Must Austerity Keep Winning?

To defeat government bashing, we need public support for the middle-class emblems of higher education and housing.

The EU’s extreme version of budget cutting has pushed the European economy ever deeper into its worst recession since World War II. The United States, pursuing a bipartisan target of $4 trillion in budget cuts over a decade, is mired in an economy of slow growth and inadequate job creation. Our government’s failure to give debt relief to indentured college students and underwater homeowners functions as a multitrillion-dollar twin drag on a feeble recovery. The smart money knows just how weak this economy is. Federal Reserve Chair Ben Bernanke had only to suggest that he might nudge interest rates up a bit, and markets panicked.

So austerity is the wrong medicine for the prolonged aftermath of a financial collapse. Case closed.

But hold on. Winning the intellectual debate doesn’t matter, because we keep losing the politics. Until we start changing the policies, or at least begin causing more political embarrassment for the budget hawks, austerity will reign, no matter how perverse its impact.

Why are we losing the politics? For one thing, the Wall Street view of austerity reaches deep into the Democratic Party. President Barack Obama and his advisers are still convinced that we need those trillions in budget cuts. That makes his rhetoric about infrastructure spending and other serious uses of public resources hollow if not cynical. And Obama is the left wing of what passes for mainstream debate. Obama’s speeches since his re-election are a mishmash of bold calls for public investment (universal pre--kindergarten, an infrastructure bank) and genuflection to the conventional fiscal wisdom. (“The package I am offering includes some difficult cuts that I do not particularly like.”)

Republicans, meanwhile, use any vehicle that comes along—the sequester, debt-ceiling votes, even the doubling of interest rates on Stafford college loans—to extract even harsher cuts. If the cuts damage the economy (and they must), so much the better for the GOP. They can blame the continuing slump on Obama and the Democrats and win the Senate in 2014 and the presidency, they hope, in 2016. With the president of the United States, a Democrat, having reinforced public myths about deficit cutting, it’s difficult to pin the political blame on Republicans for sabotaging the recovery.

So what’s a progressive to do?

One strategy is to bring tangible debt relief to students and homeowners, dramatically demonstrating that the problem is not public debt but private debt on the backs of those who can least afford it. Oregon has pioneered a pilot program that would allow a student to attend a public university debt-free. Sponsors propose a contractual obligation to repay the state 3 percent of net income for 24 years. At an annual income of $40,000, that’s only $1,200 a year, or $100 a month, far less than most college loans. The Oregonian who strikes it rich would pay a good deal more.

The Oregon model is important far beyond its impact on the next generation of students because it reclaims faith in two abiding progressive principles: that public institutions should be publicly funded and affordable and that one’s obligations should be based on the capacity to pay. A graduated repayment schedule (like the progressive income tax) would be even better. Politically, the Oregon plan is a powerful rebuttal to Peter G. Peterson and the corporate “Fix the Debt” campaign, with its professed concern for “our children and grandchildren” justifying reduced social outlay. But government outlay to lift the blight of student debt tangibly helps our children right now.

For homeowners, the federal government has failed to produce adequate refinancing and principal reduction. Obama’s programs have helped just one underwater homeowner in ten. But some local governments have begun experimenting with the use of eminent domain to take control of toxic mortgages that have been sliced and diced into bonds. Government then converts them back into whole loans, passing the savings along to homeowners who stand to get deep relief on the principal owed. The work of community groups and unions, the strategy relies on private investors willing to provide the front money. It would be even better if government provided the initial capital.

As politics, what could be more emblematic than housing and higher education to defeat the forces of austerity and government bashing? Both epitomize the efficient use of public debt to propel millions into the middle class. Both vividly demonstrate the affirmative potential of government, up close and personal.

If logic and evidence were the keys to changing the views of policy elites, the insights of thinkers like Paul Krugman and Joseph Stiglitz would have reversed conventional fiscal wisdom long ago. But both national parties remain substantially captured by the pain lobby. The only way to dethrone austerity is to take back the narrative, the politics, and the policies from the ground up.

This year, a progressive populist may finally get the Democratic nomination. Why did it take so long?

About the Author

Robert Kuttner is co-founder and co-editor of The American Prospect, and professor at Brandeis University’s Heller School. His latest book is The Stakes: 2020 and the Survival of American Democracy. In addition to writing for the Prospect, he writes for HuffPost, The Boston Globe, and TheNew York Review of Books.